Urbana, Illinois
September 25, 2006
Recent price behavior in the corn market has
provided less incentive to store the early harvested 2006 crop, said a
University of Illinois
Extension marketing specialist.
"On the cost
side, commercial storage rates have increased in
many areas for the first time in a number of years
to finally acknowledge the increasing costs of
building and owning storage facilities," said Darrel
Good. "Commercial storage rates may exceed the
current carry in the market so that forward-pricing
corn stored commercially for later delivery is not
profitable.
"The carry, however, exceeds the out-of-pocket costs
for using existing on-farm storage facilities, but
the returns for forward pricing have been reduced."
Good's comments came as he reviewed the corn market
as the 2006 harvest gets under way.
"Prospects for a sharp draw down in U.S. and world
grain inventories during the current marketing year
suggest that spot cash corn prices will move higher
over the next several months," he said. "However,
recent price behavior has resulted in less incentive
to store the early-harvested crop."
Good noted that prospects for large year-ending U.S.
corn stocks and a large 2006 harvest, along with
ideas that transportation costs could remain high,
resulted in a very weak new crop corn basis during
most of August. In addition, spreads in the futures
market became relatively wide.
In mid-August, for example, the average harvest
delivery bid in central Illinois was 37 cents under
December 2006 futures, 52 cents under March 2007
futures, and 70 cents under July 2007 futures.
"Depending on expectations about basis levels in the
spring of 2007, the market was offering about 50
cents per bushel to store the crop from harvest to
late spring of 2007," said Good. "That potential
return to storage exceeded the full cost of storage,
including interest, for many producers.
"Cash bids for harvest delivery at that time were
near $2. Through a combination of low prices and a
large return to storage, the market was strongly
encouraging producers to plan to store as much of
the unpriced crop as possible."
The price structure changed over the past few weeks
as the market worried about a late harvest and a
harvest that could get stretched out due to a period
of wet weather. There are also some who believe that
the USDA's September production forecast overstates
the potential size of the 2006 crop, pointing to an
implied high average ear weight in that report and
reports of lower-than-expected yields in some areas.
"In addition, crop condition ratings--60 percent in
good or excellent condition as of Sept. 17--do not
point to a yield as high as the 154.7 bushels
forecast by USDA, even though actual yields have
exceeded yields projected by crop ratings for the
past seven years," said Good. "It is rare, but not
unprecedented, for the production estimate in
January after harvest to be below the September
forecast following an increase in the forecast from
August to September.
"Over the past 35 years, that scenario occurred
three times--1973, 1974, and 1990. There were only
eight years in total over the past 35 that the
January corn production estimate was below the
September forecast by a meaningful amount. The USDA
will issue a new production forecast on Oct. 12."
On Sept. 22, the average spot cash bid for corn in
central Illinois was $2.30. That bid was 25-1/4
cents under December futures, 38-1/2 cents under
March 2007 futures, and 53-1/4cents under July 2007
futures. For corn stored from harvest until March
2007, the market was paying 13 cents less for
storage than in mid-August, while the return to
storage until late spring 2007 was down 16 cents.
Forward cash bids for January delivery in central
Illinois are currently only about 14 cents above the
spot cash bid. Depending on the magnitude of
expected basis, the market is paying about 35 to 40
cents to store corn from now until late spring 2007
in central Illinois.
"Storing corn unpriced may still be an acceptable
marketing alternative for a portion of the crop
since market fundamentals suggest that prices could
move significantly higher as the marketing year
progresses," Good said. "For high-cost storage
situations, however, an increase in futures prices
along with a typical strengthening of the basis will
be required to recover the full costs of storage. In
those situations, other alternatives can be
considered.
"Those alternatives include just selling the crop at
harvest and avoiding the substantial cost of
ownership. For those who believe that futures prices
will increase, the strong basis and smaller carry in
the futures markets now mean that basis contracts or
replacing cash sales with long futures positions can
be considered as an alternative to physical
storage."
Ownership of call options, rather than a basis
contract or ownership of futures might also be
considered in order to manage downside price risk,
he added.
"However, at-the-money call options are rather
expensive, raising the cost of ownership through
options, so that strategies to reduce the options
cost might be considered. These strategies generally
involve selling call options with higher strike
prices against the long call options. Such
strategies reduce the next cost, but also establish
a price ceiling."
For the 2005 crop, loan deficiency and
counter-cyclical payments were very large for corn.
"As prices move to levels that reduce or eliminate
these payments, there is more incentive to develop
sound marketing strategies for corn," Good said.
"Strategies should adjust as price levels and price
relationships change."
By
Bob Sampson |